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OBC: Stress on efficiency…

May 26, 2003

Oriental Bank of Commerce (OBC) is one of the most profitable public sector banks in the country and has been one of the key beneficiaries of the re-rating of the banking sector. To put things in perspective OBC’s stock price has gained close to 145% in the last three months alone. One of the reasons for this optimism is the robust financial performance the bank has shown in FY03. We take an in depth look at the bank’s performance in FY03 and its prospects going forward. In FY03 OBC has reported an 8% growth in topline while the bottomline growth has been more robust at 43%. While the bottomline growth has been robust topline growth in FY03 has shown a consistent decline across the quarters. We believe that the bank's advances growth seem to be slowing down. This may be due to increased competition from other public sector as well as private sector peers. This is also apparent from the fact that the bank’s advances growth was 10.7% compared to an industry (bank credit) growth of 12.2%. Another reason for slowdown in topline growth may be due to the fact that since banks have been booking profits on their G-Sec portfolios, the yields on incremental investments have been dropping strongly, thus this seems to have led to lower interest income from investments (mainly in G-Secs).

Topline growth aside, bottomline growth has been mainly fueled by improvement in net interest income and to a certain extent due to growth in other income. Net interest income has shown a growth of 24% in FY03, mainly fueled by a fall in interest expenses. Interest expenses have fallen primarily on account of lower cost of deposits (from 7.7% to 7.0% in FY03). As a consequence, net interest margins seem to have improved to 3.6% from 3.4% last year. The bank has also been able to improve employee efficiency considerably and this has further helped in the bottomline performance. An indicator of this has been the fall in cost to income ratio from 37% to 33% in FY03.

On the other income front, the bank has shown a 14% rise in the same. Out of the total other income of Rs 5.4 bn, over 60%, or Rs 3.7 bn, came from profits earned from sale of investments. This indicates the extent to which OBC’s other income has been helped by falling interest rates. This also indicates that such levels of other income are not sustainable in the long run, especially when interest rates stop falling and start to stabilize. However one aspect of other income that must be emphasized in OBC’s case is that almost all of the profits made on the G-Sec portfolio have been used to provide for NPAs. This indicates the bank’s resolve to clean up its books aggressively.

Due to the bank’s aggressiveness regarding NPA provisioning, the bank’s net NPA to net advances ratio has improved to 1.4% (80% coverage) from 3.2% last year. This is one of the lowest in the industry indicating that the bank may not have to provide so aggressively in the future for NPAs. Lower provisioning requirements will help the bank improve its bottomline performance going forward.

Oriental Bank of Commerce has stood out as compared to its public sector peers mainly due to its quality of assets as well as its operational efficiencies. The bank’s performance has been greatly helped by a falling interest rate scenario and a robust retail credit market. The bank’s aggressiveness in NPA recoveries has further helped the bank improve its asset quality. The bank due to its increased efficiency and improved asset quality seems to be in a good position to take the competition head on. The stock has risen considerably in the last one month, mainly due to the announcement that the bank is likely to pay back Rs 500 m to the government, this had buoyed sentiment regarding this stock. But pressure on core business of advances seems clear and the performance of the stock on the markets from here on may be very well determined by how well the bank is able to manage competition.

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